4 TRENDS AND CURRENT STATUS OF FOREST CHARGES

As in most forest revenue systems, the charges paid to the Government in Fiji can be grouped into three main types:

• charges for the use of the forest resource;

• charges to cover the cost of services provided by the Government; and

• general taxes paid by all companies and individuals.

In addition, a number of informal or unofficial charges have also been introduced in recent years.

These charges vary according to the type of forest, ownership and location. In addition, different parts of the government administration have responsibilities for fixing, assessing and collecting these different charges. This section of the report describes the trends and current status of the first two types of charges outlined above. The payment of taxes is noted here (for completeness), but will be discussed in more detail in Section 6 of this report.

4.1 Current levels of forest charges

4.1.1 Charges for harvesting roundwood in the indigenous forest

A summary of all of the different forest charges currently paid for harvesting roundwood in the indigenous forest in Fiji is given in Table 7 and a brief description of each of them is given below. The first five charges (royalty, premium, commission, goodwill and land rent) represent charges for the use of the resource. With the exception of the land rent (which is relatively small) they account for the majority of total charges paid. The other charges are charges paid for services provided by the Forestry Department and NLTB.

Table 7 Summary of forest charges in Fiji in 2003

Type of charge

Amount by species class (in FJD per m3)

Class 1

Class 2

Class 3

Class 4

Royalty

Zone 1 (Viti Levu)

40.00

30.00

10.00

6.50

Zone 2 (Vanua Levu)

40.00

30.00

9.30

6.00

Zone 3 (elsewhere)

32.00

32.00

8.00

6.00

Premium

Zone 1 (Viti Levu)

4.00 - 6.00

Zone 2 (Vanua Levu)

nil

Zone 3 (elsewhere)

nil

Commission

Zone 1 (Viti Levu)

20.00 - 45.00

10.00 - 20.00

10.00 - 15.00

10.00 - 12.00

Zone 2 (Vanua Levu)

15.00 - 25.00

10.00 - 15.00

10.00 - 15.00

10.00 - 12.00

Zone 3 (elsewhere)

data not available

Goodwill

0.50-12.00

Land Rent

varies

Scaling Fee

3.50

Map Fee

varies (charged on the basis of cost recovery)

Application Fee

varies (charged on the basis of cost recovery)

Renewal Fee

varies (charged on the basis of cost recovery)

Processing Fee

varies (charged on the basis of cost recovery)

Source: various documents, interviews and field visits.

Royalty: royalties are official charges that are fixed by Ministerial Decree and charged per cubic metre. For the purpose of fixing the royalties, Fiji is currently divided into three zones to reflect the differences in operating costs between the different islands. Royalties are also divided into four species classes to reflect the different qualities and values of products that can be manufactured from each species. A list of the species currently included in each royalty class is given in Table 8.

Table 8 Species distribution by royalty class

Species

Royalty class

Class 1

Class 2

Class 3

Class 4

Amunu

Buabua

Dakua Makadre

Dakua Salusalu

Kuasi

Rosawa

Vesi

Yaka

Bauvudi

Dabi

Damanu

Dilo

Kauceuti

Kaudamu

Kaunicina

Kauvula

Mavota

Nawanawa

Sagali

Raintree

Doi

Dogo

Laubu

Qumu

Rosarosa

Sacau

Sausauira

Tivi

Vaivai-ni-veikau

Yasiyasi

All native species not included in Classes 1-3, with the exception of Yasidina (Sandalwood - Santalum yasi) to which special conditions apply.

Source: Forestry Department.

Premium: premiums have been recently introduced by NLTB and are charged per cubic metre. Currently, premiums are only charged in Zone 1 (Viti Levu). The standard premium rate is FJD 6.00/m3, although one sawmiller said that they paid FJD 6.00/m3 for harvesting in primary forest and only FJD 4.00/m3 in secondary forest. Premiums are paid in advance on the volume that will be harvested and are distributed amongst landowners immediately. NLTB stated that the original intention of these charges was to give landowners some immediate revenue once a harvesting licence has been approved.

Commission: commissions are payments (usually per cubic metre) that are negotiated directly between the producer and landowners. A range of figures was quoted in documents and during interviews with sawmillers and landowners. Table 7 gives the range of figures quoted, although the consensus was somewhere nearer the lower end of the ranges given above. Commissions vary by species class. In particular, much higher commissions are usually paid for species in Class 1. Commissions in the lower valued species classes may not vary by very much. Commissions may also be higher in Zone 1 than Zone 2, although this could be as a result of the particular individuals that were interviewed rather than a reliable statistical estimate. Commissions have no formal legal status, but are often codified in the contracts that are made directly between producers and landowners.

Goodwill: goodwill is another benefit to landowners that is paid for by producers. Goodwill payments can be in cash or in kind and can include activities such as building or improving roads in the community, providing free forest products or other goods and building other types of infrastructure for the local community. Once the cost of goodwill is spread across the volume harvested, a wide range of payments (per cubic metre) was quoted in documents and interviews. Goodwill payments have the same legal status as commissions. Commissions and goodwill payments are both recent innovations, which apparently started when producers wanted to encourage more landowners to allow harvesting in their forests.

Land Rent: land rent is paid each year by those producers that hold long term forest concessions. Land rent varies and it was not possible to collect information about the level of land rents. However, the most that can be charged as land rent is six percent of the unimproved capital value of the land (USDC, 2000), so forest land rent is likely to be quite low. Land rent assessed every five years by NLTB, who have the legal power to do this.

Scaling Fee: the Forestry Department collects a scaling fee on every cubic metre of roundwood that is harvested. This fee does not vary by species or location and is supposed to cover the Forestry Department’s costs of production monitoring and control.

Map Fee: the Forestry Department also charges for the production of a harvesting map and plan, which is a necessary part of any licence. The charge reflects the cost of production and is generally quite small. Amounts of FJD 100 to FJD 200 (in total) were quoted during interviews.

Application, renewal and processing fees: these fees are charged by NLTB to cover their administrative costs of processing and approving licences. Figures quoted were in the range of FJD 1,000 to FJD 1,500 in total (for a first application) and less for a renewal.

4.1.2 Charges for harvesting roundwood in forest plantations

The majority of forest plantations in Fiji are the pine plantations managed by FPL and the mahogany plantations managed by FHCL. However, there are also some small areas of forest plantations owned and managed by private individuals (extension plantations). Most of the above charges do not apply to harvesting in the extension plantations (although a proportion of the total land rent of an agricultural landholding would be attributable to any forest plantations therein, if the landholding was on native land). In addition, the Forestry Department was somewhat uncertain about whether production monitoring and control would be required in such areas and, therefore, whether the Scaling Fee would be charged.

For the other forest plantation areas, the Government has devised a different system for assessing and collecting forest charges. For example, in the mahogany plantations, charges will be assessed as follows:

• landowners will receive land rent for the lease of the land covered by the forest plantations;

• landowners will receive 10 percent of the stumpage value of all harvested roundwood; and

• landowners will hold a share in the equity of FHCL through the Fiji Mahogany Trust (FMT).

The first two benefits above are similar to the land rents and royalty payments that landowners currently receive from harvesting in the indigenous forest. The equity share in FHCL has yet to be decided (Government of Fiji, 2002) and the dividends from this will be used to acquire further shares in FHCL or to pay for other services for the benefit of landowners.

4.1.3 Other forest charges

There are some small charges for the production of other forest products (e.g. posts, poles and fuelwood), but the volumes harvested and amounts collected are relatively small. In addition, the Forestry Department charges user fees for entry to some forest parks and to recover the cost of some other services provided. A small amount of money is also collected from fines for forest offences. Further details of the amounts collected from these charges are given in Table 30 in Appendix 1.

There are no specific forest charges on the processing of forest products or the trade and sale of forest products, other than general taxes (e.g. income tax, value-added tax (VAT), import and export duties).

4.2 Trends in forest charges

Premiums, commissions and goodwill are relatively recent charges that have been introduced by the NLTB and landowners. Apart from these developments, forest royalties have been raised on three occasions in the last two decades. Table 9 shows the forest royalties charged since 1982 and compares them to changes in general prices (GDP inflation) and sawnwood export prices over the same period.

As the table shows, since 1982, forest royalties in Fiji have been simplified, with the reduction in the number of royalty classes from five to four. In addition, the number of different zones has been reduced from four to three. Originally, the two main islands were split into two different zones for the purpose of setting forest royalties. These zones have been merged on both of the islands and a third zone has been created to accommodate harvesting on the other islands. It should also be noted that although the two main islands are in different zones, the royalties in these two zones have been the same in the top two species classes since 1990 and differ only slightly in the other two classes.

Figure 14 shows the trends in royalty rates in Zone 1 (Viti Levu) for each of the four species classes since 1982 after adjustment for inflation (i.e. the figures are all converted to 2003 prices using the GDP deflator for Fiji). This shows that increases in royalty rates have fallen slightly behind inflation for Class 3 species. Increases in royalty rates for Class 2 species have matched inflation and increases for Class 4 species have been slightly higher than inflation. Increases in royalty rates for Class 1 species have been well above inflation, although the last increase (in 2001) did not return the real level of the royalty to the level achieved with the previous increase (in 1995). The real increase in royalty rates for Class 1 species amounts to about 25 - 30 percent on average over the period. This high increase is presumably justified by increases in the selling prices of sawnwood manufactured from these species.

Figure 15 presents this information in a slightly different way and shows how the cumulative increases in royalty rates (not adjusted for inflation) compare with increases in general prices (GDP inflation) and sawnwood export prices. This confirms that increases in royalty rates for Class 1 species have been broadly in line with increases in sawnwood export prices.

4.3.1 Process of setting forest charges

The harvesting and extraction of forest products in Fiji is controlled by a number of licensing requirements that fall under the control of the Forestry Department and NLTB. Specifically, the following legislation refers to licensing and the payment of fees:

Reg. 10 “The Board may, by licence, grant such rights in, on, under or over native land, for such purposes and subject to such terms, conditions and covenants as the Board shall determine.”

Sec. 33 - Native Land (Forest) Regulations, Cap 134:

Reg. 8(1) “All forest produce cut, sawn, converted, collected or removed under a licence in Forms 1 or 2 shall be liable to royalty at the rate laid down in the royalty rate list in the Second Schedule:”

Forest Decree, 1992:

Sec. 16(1) “A licence shall be subject to the payment of such fees as may be prescribed.”

Sec. 38(2) “prescribe -

(i) in the royalties due on produce cut or collected under licence on State land or on native land in forest reserves;

(ii) the fees and any other charges due to the State on produce cut or collected under a licence on any land.”

The above legislation states that both the Forestry Department and the NLTB have the power to award licences and set forest charges.

Current practice is for the Forestry Department and NLTB to consult with the forestry industry and to agree between themselves what the level of forest royalties should be. There is no formal system of formulae and/or calculations for the revision of forest charges, although it appears that past revisions have been broadly in line with inflation and changes in sawnwood prices. Revisions in the past have taken place infrequently, but the aim now is to revise the forest royalty rates every 2.5 years.

For the informal charges (commissions and goodwill payments), the level of charges are negotiated directly between forest operators and landowners. In addition to the official licences from NLTB and the Forestry Department, most harvesting operations are also governed by a legal contract between the operator and landowners, which specifies the payments that should be made.

4.3.2 Collection and distribution of forest charges

The collection and distribution of forest charges is closely tied to the awarding of licences and the monitoring of forest operations by the Forestry Department.

In order to harvest forest products, landowners must first apply for a licence from NLTB. This is relatively easy for native land outside reserves, but is quite difficult for native reserve land (where the applicant(s) must get the majority agreement of all of the relevant landowners). The licence from NLTB is awarded in the name of the applicant(s) (i.e. landowners), but the producer or “contractor” is usually specified on the licence. At the time that the licence is issued, NLTB collects the application or renewal fee and processing fee, plus an advance payment for royalties and premium (where applicable). These fees are normally paid by the producer.

In addition to this, the producer must also obtain a Forestry Right License. This is awarded by the Forestry Department and is subject to the producer submitting a forest management or harvesting plan and abiding to all forestry regulations. The licence is free, but requires a map and the Forestry Department collects a small charge for this. The Forestry Department also usually collects an advance payment for some of the Scaling Fees that will be due.

When production starts, the producer must obtain a permit to cut and remove the harvested forest products. Forestry Department staff visit production areas to record and mark production, usually in the presence of both the producer and a landowners representative. Permits are time-bound, so the frequency of inspections is dependent on the level of production and the times at which producers wish to take their products to the mill. This information is then entered into the Forestry Department’s management information system, which is used to record production and calculate the royalties and scaling fees due. The Forestry Department invoices producers for the Scaling Fees and sends the royalty information to NLTB. NLTB is now (since October 1996) responsible for the invoicing and collection of royalties and premiums.

NLTB distribute 90 percent of the royalties collected in each mataqali to the landowners registered in that mataqali, according to a formula. NLTB are encouraging landowners to accept payments directly into bank accounts, otherwise NLTB have to visit landowners to pay them in cash. There was some debate about the length of time it took for NLTB to distribute this money, with some stakeholders complaining that it could take up to six months (or more) for money to be distributed.

The other ten percent of the royalties collected is retained by NLTB to cover their administration costs. This proportion has fallen from 25 percent (and then 15 percent) in recent years. NLTB believe that the current figure is too low to cover all of their costs, which is why they have introduced higher application and processing fees. In contrast, discussions with the Forestry Department suggested that they believe that the Scaling Fees and Map Fees that they collect are sufficient to cover their costs of monitoring and administration.

Commissions and goodwill payments are paid directly by producers to landowners (or their representatives) according to whatever they have agreed. Interviews with stakeholders suggested that these payments are preferred by landowners because this money is distributed far more quickly than the royalties are. For example, one landowner said that they got their commissions within one week of the logs leaving the forest. It should be noted that there are no rules governing the distribution of this money and it is unclear whether these payments benefit all landowners. However, one producer did say that they pay commission and goodwill into a community fund, which is controlled and used by the community for social projects.

4.4 Trends in total revenue collection

4.4.1 Structure and composition of forest revenue

Trends in the structure and composition of forest revenue are shown in Figure 16 and further details are available in Table 30 in Appendix 1. This figure shows that total revenue collection increased from around FJD 750,000 in 1977 to around FJD 3 million in 2002. The majority of forest revenue is collected from the few long-term forest concessions still operating in the country, although revenue from other types of licences has been significant in some years (e.g. 1996 and 1997) and is believed to be growing in importance. Other sources of revenue include miscellaneous charges (user fees, map fees, fines, etc.) and revenue from commercial operations (most of which were hived-off from the Forestry Department in 1996).

Figure 16 Trends in the structure and composition of forest revenue collected by the government in Fiji 1982 - 2002

Source: Forestry Department. Note: the figures for 1977-1980 and 1999-2002 exclude other sources of revenue and revenue from scaling fees is excluded for the latter period as well. These figures also do not include revenue collected from operations in the pine and mahogany plantations.

Figure 17 shows the average level of royalty payment adjusted to 2003 prices over the period 1977 - 2002. This shows that the average payment has more than doubled from around FJD 12.50 to FJD 27.00 over the period. Given that the royalty rates in Classes 2 to 4 have increased broadly in line with inflation and the rate for Class 1 species has increased in real terms by only about 25 percent, this implies that the composition of harvesting has tended towards Class 1 and Class 2 species in recent years.12 The importance of these species is confirmed by Figure 18 (and Table 31 in Appendix 1), which shows that species in Classes 3 and 4 accounted for about one-quarter of production and less than ten percent of royalty payments in 1999 and 2000. In contrast, species in Class 2 accounted for 55 percent of production and 61 percent of total royalty payments.

Figure 18 Distribution of production volumes and total royalty payments by species class in Fiji in 1999 and 2000

Source: Forestry Department (2001).

4.4.2 Administrative efficiency

An important feature of any forest revenue system is the administrative efficiency of the system or the costs of revenue collection compared to the total amounts collected. The trend in the real level of the Scaling Fee is shown by the black line (measured against the right axis) in Figure 19. This shows that, after adjusting for inflation, the level of the Scaling Fee has remained constant at about FJD 3.50 (at 2003 prices) over the last two decades. As the average level of royalty payments has increased in real terms, the level of the Scaling Fee relative to the average royalty payment has fallen over the same period. The grey line (measured against the left axis) in Figure 19 shows that Scaling Fees have fallen from an additional 30 percent on top of royalties throughout much of the 1980s to around 15 percent in more recent years. Assuming that the Scaling Fee does cover the Forestry Department’s costs of monitoring and administration (as they seem to think it does), this figure is remarkably low compared with many other countries, suggesting that the forest revenue system is efficient.

4.4.3 Contribution to government expenditure on the sector

Figure 20 shows the trend in total government expenditure on forestry from 1981 to 1998 (adjusted for inflation to 2003 prices), along with the contribution to expenditure from revenue collected and retained by the government (i.e. excluding royalties). As the figure shows, the total level of government expenditure on forestry in Fiji has remained roughly constant over the period at between FJD 7 million and FJD 9 million per year (at 2003 prices). Thus, there is very little correlation between expenditure and production from the natural forest, suggesting that production monitoring, control and revenue collection activities do not account for a significant proportion of government expenditure on the sector.

The amount collected from Scaling Fees has declined from just under FJD 1 million (at 2003 prices) in the early 1980s (around 10 to 15 percent of expenditure), to about FJD 500,000 (around five percent of expenditure) in recent years. Net government expenditure on the forestry sector has been about FJD 7 million (around 80 percent of the total), showing that the implementation of forestry policy has been largely financed by the state.

Figure 20 Trends in net and total government expenditure on forestry in Fiji 1981- 1998 (at 2003 prices)

Source: Forestry Department (1998 and earlier). Note: the total height of the bars represents total government expenditure on the sector.

11 The discussion here is restricted to charges on harvesting of natural forest on native land. NLTB are not involved in harvesting on private land or crown/state land. (In the latter, royalties are charged but are retained by the Government). Although the Forestry Department are responsible for the supervision of harvesting on private land, very little production comes from private land and it is unclear what charges, if any, would be levied. The charges collected from operations in private forest plantations on native land are restricted to the land rents levied by NLTB on agricultural land and are arranged accordingly. Arrangements for setting, collecting and distributing charges from operations in the mahogany and pine plantations are also organised differently (see Section 4.1.2).

12 An alternative interpretation is that the most commonly harvested species have been reclassified into higher value species classes over the period, but this seems unlikely.